Qaddafi loyalists from the infamous Brigade 93 seized the Libyan city of Bani Walid on Tuesday after clashes with fighters from the new regime erupted the previous evening.
The Brigade is named for its key brutal role in smashing a 1993 revolt against the rule of late dictator Muammar Qaddafi - and liquidating the leaders of the uprising.
Fighters loyal to the new government were forced out of the city - once a bastion of Qaddafi resistance to the revolution - in what observers are calling the most serious challenge to the interim government since Qaddafi's ouster.
Hundreds of well-equipped and highly trained soldiers from former Qaddafi forces raised the green flag over buildings in the western city late Monday before driving "revolutionary forces" from the town.
The renewed fighting reportedly started when revolutionary fighters attempted to arrest one of the loyalists.
The head of Bani Walid's military council, Abdullah al-Khazmi, confirmed Qaddafi loyalists had taken the city. He and his men had fallen back to positions on the eastern outskirts of Bani Walid, where hundreds of pro-NTC reinforcements from Benghazi were deployed, with convoys of cars mounted with machine guns.
al-Khazmi confirmed his command post had lost contact with other revolutionary fighters in the town.
Bani Walid, located in the mountains 90 miles southeast of Tripoli, was one of the last Qaddafi strongholds to fall to revolutionary forces in the civil war. It held out for weeks after the fall of the regime, with loyalist fighters dug into its formidable terrain of valleys and crevasses.
Loyalist snipers exacted a horrific death-toll among revolutionary fighters during the months-long siege of the city.
Qaddafi's son and longtime heir apparent, Seif al-Islam, was long believed to have been hiding in the town, but was ultimately captured in November by fighters from the town of Zintan in Libya's western mountains, who continue to hold him.
The retaking of Bani Walid comes as Libya's new leaders struggle to unify the tribally and regionally divisive oil-rich North African nation three months after Qaddafi was captured and killed.
The main tribe in Bani Walid is a branch of the Warfala tribal confederation, which was favored by Qaddafi and stretches around the country with around 1 million members.
The revolt is only the latest breakdown in security, three months after Qaddafi's capture and brutal summary execution in the field.
Protests have surged in recent weeks, with people demanding that the interim leaders deliver on promises of transparency and compensation for those injured in the fighting.